ETF Playbook - Monday: March 5, 2012

Short-term, the risk is high of a garden variety rotational correction of -5% to -8% given the deteriorating internal makeup. But, the intermediate-term is constructive, which would seem to put a very major high off into the future. All of which means we are more aggressive buyers of a correction into established support levels.

The “canries in the coal mine” related to a much needed short-term correction:

1. DJ Transports (IYT) have shown both absolute and relative weakness recently; this is due in large part to the rise in crude oil prices. But yesterday rallied.

2. S&P 500 (SPY), Dow Industrials (DIA); Brazil (EWZ), Copper (JJC), Base Metals (DBB), Silver (SLV) and Gold Shares (GDX) all formed key reversals lower on Wednesday, which shows exhaustion of the prevailing trend.

POTENTIAL LONG TRADES

√ Gold ETF (GLD)  trendline and the 70-dma/140-dma cross were violated to the upside, which puts the trend higher.But yesterday’s decline is back into this zone. If it holds, then we’ll consider adding the metal.

√ Japan ETF (EWJ)  the 400-dema breakout is bullish; and if it can hold and trade in a sideways consolidation back to this level, then we are very interested buyers. If not, then we are interested buyers on a deeper correction in tandem with our models.

√ Latin America ETF (ILF)  the nascent 320-dma breakout is bullish; although prices are into previous low overhead resistance, with our models in a bearish configuration. We look to be buyers of weakness.

POTENTIAL SHORT TRADES

√ Dow Transports (IYT)  Prices have broken down out of a bearish wedge; downside support is the 200-dema at $89.25.

√ Retail (RTH)  the key reversal lower at the highs suggests a correction is underway; however, the shares can be hard to borrow for shorting purposes.

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